INDITEX: Lessons in “Fast Fashion”

The global fashion retailer Inditex, best known for its Zara brand, continues to chart the course of “fast fashion” through the intimate alignment between its operating and business models.

Inditex is an example of a company that is highly effective at driving alignment between its operating model and its business model. Its business model seeks to provide global consumers with the latest designs, at high quality, affordable prices and most importantly at speed. [1] Inditex differentiates itself from its competitors most successfully through its ability to understand exactly what products global consumers are demanding and to get them into store quickly. If consumers’ tastes change mid-season, Inditex is able to respond by designing and manufacturing new items and delivering them to stores rapidly. In 2014 Inditex produced 36,000 different designs and delivered these to global stores at least twice per week. [1]  This is in contrast to traditional apparel retailers who anticipate customers’ demands and manufacture the entire collection ahead of each season.

The company’s speed in providing cutting edge fashion and responding to customers’ demands on an on-going basis is clearly to the market’s taste. As a result, Inditex has achieved exceptionally strong financial performance and global expansion. Between 2010 and 2014, Inditex grew net sales by approximately 10% CAGR. In 2014 alone the company increased retail space by 10%, opening 343 new stores in a number of prime locations globally. [2] Crucially, this has been achieved at a time when many global apparel retailers have been struggling.

In my view, there are three key features of Inditex’s operating model that support its highly successful business model:

(1) Rapid information flow supported by internal employee training programmes and highly centralised design, prototyping and production facilities.

Central to delivering fast and frequent fashion is the company’s ability to engineer a rapid and daily information flow from customers, to designers, to prototyping and finally to production. This information flow operates as an on-going feedback loop that enables Inditex to understand global customers’ demands in real time and modify its designs accordingly. [1]

Information Flow [1]

Information Flow (1)

Inditex provides internal training programmes for in-store staff in customer service, product management and trends. [3] This training supports in-store staff’s ability to understand customer feedback and to transmit insights effectively back to the company’s headquarters in Spain. Once inside Inditex’s headquarters, the speed of the information flow is supported by the fact that the design, prototyping and production facilities are both vertically integrated and highly centralised (located a short walk away from one another). [4]

Information flow example: Across subsidiary Zara’s c. 2,000 global stores, shop assistants meet on a daily basis to aggregate consumer insight and feedback on designs. This information is fed back daily to Inditex HQ where the brand’s designers are based. New designs and alterations can be drawn up in a matter of hours before being sent to the workshop to be constructed into prototypes. Once prototypes are complete they are immediately inspected by the design team before being sent to production. [4]

Customer feedback [5]           In-house designers [6]             Prototyping [7]                        Production [8]

1   Inditex-design_3078392b  3  4

 (2) “Just in time” manufacturing.

Whereas the majority of Inditex’s peers have attempted to reduce production costs through outsourcing manufacturing to developing economies, Inditex has prioritised short lead times. On average the company will move apparel from design to store in as little as two weeks, while rival retailers such as GAP take up to nine months. [4][9]

 Short lead times are achieved through two key aspects of the company’s operating model including:

  • The company’s vertically integrated manufacturing base; and
  • Investment in advanced technology and extra capacity that allows Inditex’s factories to accommodate unpredictable production scheduling. [10]

Ownership of the majority of its production facilities means that, unlike some of its peers, Inditex is not dependant on the timeframes of external manufacturers and instead can employ “just in time” production scheduling. Additionally, the nature of the company’s production facilities mean Inditex can be flexible as to its batch sizes and can produce smaller batches of items on an on-going basis in response to customers’ demands. This results in a relatively low level of finished goods inventory and reduced risk of holding costs (e.g. having to discount unsold goods at the end of the season). Keeping these costs down support the company in delivering to customers on affordability.

(3) Centralised inventory management and distribution facility.

All finished goods inventory is housed in a central inventory position at the company’s headquarters before being distributed to stores worldwide twice per week.

 Central inventory position and distribution network [1]

inventory 2

Regardless of where products are manufactured they are sent back to the central distribution facility for inspection and this ensures that Inditex can deliver to customers on quality. Inditex uses both trucks and planes for distribution and these run on consistent schedules to ensure delivery to stores at least twice per week. [10] This formulaic approach to distribution scheduling has a number of benefits:

  • Customers are incentivised to visit Inditex stores more frequently since they know new trends will be coming into stock;
  • Stores know exactly when goods will be delivered and can place orders for new inventory accordingly;
  • If a customer requires an item to be ordered (e.g. if his/her size is not available) in-store staff can tell the customer with certainty when it will arrive. This increases customer trust in the Inditex brand.

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Sources:

[1] Inditex company website, October 2015 (https://www.inditex.com/documents/10279/174073/Group+Profile+October+2015.pdf/7104340f-eb6e-414f-a33f-86f9b205fd75).

[2] Inditex company website, FY2010 and FY2014 annual reports (https://www.inditex.com/en/investors/investors_relations/results_presentations).

[3] Inditex company website (https://www.inditex.com/en/talent/professional_development).

[4] Fashion: A better business model, Financial Times, June 2014 (http://www.ft.com/intl/cms/s/2/a7008958-f2f3-11e3-a3f8-00144feabdc0.html#slide0).

[5] Image: (http://www.bloomberg.com/news/articles/2014-12-18/zara-follows-shoppers-into-bedroom-with-home-store-format).

[6] Image: (http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion-retailer.html).

[7] Image: (http://www.iamthestrategist.com/substitute/).

[8] Image: (http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html?_r=0).

[9] Zara, a Spanish success story, CNN, June 2001 (http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/).

[10] Zara’s Fast-Fashion Edge, BloombergBusiness, November 2013 (http://www.bloomberg.com/bw/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge#p2).

 

 

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3 thoughts on “INDITEX: Lessons in “Fast Fashion”

  1. Hi! Great post, very instructive, especially for the Leanatic that I am. I didn’t know Inditex had pushed the logic so far as to be so flexible. Your post has raised my curiosity further about the business model, in relation to the operating model.

    Building such a state-of-the-art operating model is probably costly. How does Inditex afford such costs? Premium margins? Which in turns raises my question on how Inditex drives these high margins ==> Higher selling prices. How does Inditex propose a high enough customer value proposition besides fashionable items? How does it differenciate from peers (H&M, Gap, Primark…)? How does it create brand awareness?

    Many thanks for the post, it really enlightened the operating model of Inditex!

    1. Yes, I agree that such a state of the art operating model must come at a cost. I am aware off two key costs savings that allow Inditex to achieve this:
      1) Inditex does not advertise and instead relies on the strength of its operating and business model to grow brand awareness. In addition to providing fashionable, high quality items, the company has grown brand awareness through effective store positioning in high traffic areas and word of mouth recommendations as a result of customers’ positive in-store experiences.
      2) The company’s just in time inventory model reduces the amount of inventory that Inditex has to mark-down at the end of the season. Although I know that the company does perform a bi-annual sale so arguably there are some mark-downs, a variety of sources suggest that Inditex marks down less inventory than its peers. I’ve tried to find some hard data to illustrate that the company’s mark-downs as a % of total sales are lower than its peers but not surprisingly this is not disclosed!

      Additionally, Inditex does price its products higher than both H&M and Primark. It is able to extract a premium price due to the fact that its designs and quality are higher. Its products are priced cheaper than GAP but as I noted, GAP’s inability to adapt its operating model to respond to consumers’ demands for “fast fashion” means that it is little competition for Inditex.

  2. Hi, thank you for sharing great insight on Inditex! It was really interesting to know how 2-weeks delivery was made possible. And I could see that how its operating model supported its business model to provide consumers with the latest products speedily at affordable prices.

    Most interesting to me was the Inditex’s inventory management. I learned that sending back all finished goods to its central facility regardless of where to be made is to assure the quality. But I assumed that there is a trade-off between speed and quality as they could deliver the products more quickly if they located quality inspection team on each facility where the apparels are produced. So, I may think that if Inditex can have skilled inspection team on each manufacturing facility and company-wide inventory management system, their distribution would be more faster, i.e. they don’t need to send the products back to a central distribution center. Do you think they would do so in the future? Or still it is better to use a central distribution center?

    Kohei

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